Lobbying battle for Arcelor continues

Mittal sees profit up by more than $4 billion in next three years

By

AudeLagorce

LONDON (MarketWatch) -- The lobbying for control of European steelmaker Arcelor SA accelerated on Tuesday as Mittal Steel said it expects core earnings to rise by more than $4 billion in the next three years and revealed a business plan previously seen by Arcelor management only.

Mittal, the world's largest steelmaker, said it expects 2006 operating profit to rise 26% to $7.3 billion in 2006 and to $9.9 billion in 2008, excluding the potential acquisition of Arcelor, saying "recent global demand growth, coupled with improved market-oriented behavior by suppliers, had led to the emergence of a more stable operating environment."

Mittal, which is controlled by London-based billionaire Lakshmi Mittal, is determined to acquire Arcelor, its nearest rival, despite having been rebuffed twice in the past four months. Its latest cash-and-stock offer is currently worth about $27.1 billion. See bid battle timeline.

Arcelor (005786) shares fell 1.2% in Paris afternoon trading, while Mittal
MT, -0.94%
(36194) up 0.2%, off earlier lows, in Amsterdam. European markets were also sharply lower. See Europe Markets.

Mittal, which has led consolidation in the fragmented steel industry, is aiming to create a producer of more than 100 million tonnes of steel a year -- more than three times its closest rival -- by combining the sector's two biggest players.

Luxembourg-based Arcelor, however, favors a $16 billion hook-up with Severstal of Russia, and urged shareholders on Monday to support that transaction. Under the deal, Severstal's main shareholder, Alexei Mordashov would get about 32% of the combined company in return for Arcelor getting virtually all of the Russian steelmaker.

But some rebel investors representing about 30% of capital have criticized Arcelor for not fully exploring the Mittal bid. On Monday, Arcelor bowed to their demands for a special vote that could unravel the Severstal deal, and said it would talk to Mittal about possible improvements to its offer. See full story.

Arcelor argues Severstal case

Arcelor on Tuesday riposted by publishing a defense of its proposed tie-up with Severstal.

It said the combination of the two companies is a better business fit as both groups are focused on margins rather than volumes. Arcelor said the transaction would result in synergies of about 590 million euros a year starting in 2009.

"Arcelor and Severstal are complementary both from a geographical and an industrial standpoint," Arcelor said in a statement. It also argued that the merger would create significant synergies and lead to a pro-forma normalized combined target EBITDA of over 10 billion euros in 2008.

In terms of volume, the company resulting from the merger would be the world's leading steel producer with a combined manufacturing capacity of approximately 70 million tonnes, Arcelor said.

Arcelor also said the transaction would allow the continuation of its corporate governance model and protect the rights of Arcelor shareholders in the event of a change of control of Arcelor.

Finally, Arcelor said the combination of its production facilities in Brazil with those of Severstal in Russia would boost the competitiveness of the group thanks to lower production costs. See more global markets coverage.

Arcelor also compared the financial merits of the two possible transactions, concluding: "While Mittal Steel is offering 35 euros per Arcelor shares, the Arcelor-Severstal merger values Arcelor at 44 euros a share, which represents a 25% premium over the price offered by Mittal."

Mittal's bid is primarily in its own shares, something Arcelor said reduces the value of its offer. " Arcelor believes that the inferior quality of Mittal Steel's assets, which continue to be underinvested, and the execution risks relating to the integration of Arcelor and Mittal, are not reflected in Mittal's current share price, making the real value of the Mittal shares uncertain," the company said.

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